How to Calculate Home Loan Interest in Australia (Daily Rate Explained)

Australian home loans do not use classroom simple interest as the main engine. Lenders almost always calculate interest daily on the outstanding balance, then charge it monthly. Get that formula right and strategies like offset accounts and extra repayments suddenly make sense.

Use the loan repayment calculator for scheduled repayments, then stress extras and offset with the extra repayment and offset calculators.

The 30-second summary

• Daily interest ≈ outstanding balance × (annual rate ÷ 365).
• Banks sum those daily amounts and usually debit interest monthly.
• A rough monthly check: balance × annual rate ÷ 12 (e.g. $500k at 6% ≈ $2,500/month before principal falls).
• Principal × Rate × Time is the wrong headline story for an amortising mortgage.
• Offset reduces the balance inside the daily formula; extra repayments permanently cut that balance.
• Scheduled P&I repayments come from the amortisation formula (or a calculator), not from multiplying principal by rate alone.

The formula lenders actually use

Daily interest = Outstanding balance × (Annual interest rate ÷ 365)

Example day: $500,000 balance at 6.00% p.a.

• Daily rate factor: 0.06 ÷ 365 ≈ 0.00016438
• Interest that day: $500,000 × 0.00016438 ≈ $82.19

Over a 30-day month with an unchanged balance, that is about $2,466 - close to the simple monthly approximation of $2,500, but not identical because months have different lengths and the balance moves when you repay.

If a 100% offset holds $50,000, the same day uses $450,000:

• Interest that day ≈ $450,000 × 0.00016438 ≈ $73.97

That is the entire point of offset: same cash in your account, lower interest base every day.

Rough monthly check - $500,000 at 6%

Approach	Result
Monthly approximation	$500,000 × 0.06 ÷ 12 = $2,500
Daily accrual (30-day month, flat balance)	≈ 30 × $82.19 = ~$2,466
With $50,000 of 100% offset (flat)	≈ 30 × $73.97 = ~$2,219

Use the monthly figure for quick mental maths. Use daily logic (or a calculator) when you care about extras, offset timing or exact statements.

Scheduled repayments vs interest accrual

Interest accrual answers "how much interest did today cost?" Your minimum repayment is a different calculation: the amortisation payment that clears principal and interest over the agreed term at the contractual rate.

For a $500,000 loan at 6.00% over 30 years, the P&I repayment is about $2,998/month (see the worked table in offset account explained). Early in the loan most of that payment is interest; later more is principal. That split is why knocking the balance down early (extras or offset) saves so much lifetime interest.

What actually cuts the interest bill

1. Extra repayments - lower balance sooner; every later day costs less. Try the extra repayment calculator.
2. Offset account - lowers the balance used in the daily formula without "locking" cash into the loan. See offset account explained and the offset calculator.
3. Shorter term or higher repayment - front-loads principal reduction.
4. Better rate - if switching, model break-even in the refinance calculator.

FAQ

How do Australian banks calculate home loan interest?

Almost all retail home loans accrue interest daily on the outstanding balance, then debit it monthly. Daily interest ≈ balance × (annual rate ÷ 365). A 100% offset account reduces the balance used in that formula dollar for dollar.

Is Principal × Rate × Time the right formula for a home loan?

No for ongoing mortgage interest. That simple-interest shortcut ignores daily compounding of the balance as repayments and redraws change it. Use the daily formula for accrued interest, and the standard amortisation formula (or a loan repayment calculator) for the scheduled repayment.

Roughly how much interest is $500,000 at 6% a month?

A quick monthly approximation is $500,000 × 0.06 ÷ 12 = $2,500 before principal reduction. Banks actually charge day by day, so the month's total is the sum of daily accruals and will be a little different once you start paying principal down.

How do extra repayments reduce interest?

Any amount above the minimum cuts the balance earlier, so every following day's interest is calculated on a smaller number. The earlier you pay, the more days benefit. Model it in the extra repayment calculator.

How does an offset account change the calculation?

Daily interest uses (loan balance − offset balance) × rate ÷ 365 on a 100% offset. Keeping $50,000 offset on a $500,000 loan means interest as if the loan were $450,000 while the cash stays accessible.

What is the difference between the interest rate and the comparison rate?

The interest rate is what accrues on the balance. The comparison rate folds in many fees so you can compare products more fairly. Always check both when shopping loans.

Next step

Estimate your repayment in the loan repayment calculator, then compare extra repayments versus an offset. For how the cash rate relates to the rate on your loan, see understanding Australian mortgage rates.

This article provides general information. Individual loan contracts define exact accrual rules (including leap-year treatment) - check your product disclosure statement or lender for specifics.